Latvian holding company

[JustAnotherNomad]

As a holding company for which company - an EU or non-EU company?

If an EU company then there is little advantage over other EU holding companies i.e Cyprus, Estonia, Malta, Bulgaria one etc etc due to EU parent subsidiary .

Actually there seems to be a massive difference when you sell the subsidiary.
I am going to be a >10% shareholder in an EU company and when I sell my shares, I would prefer the sale to be tax free.
Turns out that while even socialist countries like Sweden or Norway would apply the participation exemption for the sale of qualifying shares, Estonia does not. In other words, Estonia would tax your exit from a startup at 20% on the holding company level, while Sweden wouldn’t. Sure, as long as you don’t pay out any profits from the holding company, there is no difference.
But that makes Estonia utterly useless for such a case. It would only be useful for receiving dividends.

Latvia and Lithuania on the other hand don’t tax capital gains from qualifying shares, provided the shares have been held for 3 years or something. And Latvia doesn’t apply withholding tax on dividends paid to a resident of most countries.

The only thing you need to look out for is any substance requirements for the holding company

That’s the thing: Cyprus is a red flag and I’m worried that the other country (not Cyprus) will have additional substance requirements to recognize the holding company. But maybe that’s something to be aware of in general and they may be just as strict with a holding company from Latvia?

 

[JustAnotherNomad]

Latvia doesn’t apply withholding tax on dividends paid to a resident of most countries.

Now I read that Latvia applies 10% personal income tax on dividends paid out to individuals, even non-residents. That can’t be right...?

 

[Marzio]

That can’t be right...?

source

 

[Martin Everson]

In other words, Estonia would tax your exit from a startup at 20% on the holding company level, while Sweden wouldn’t. Sure, as long as you don’t pay out any profits from the holding company, there is no difference.
But that makes Estonia utterly useless for such a case. It would only be useful for receiving dividends.

Yes distribution of income is subject to tax on sale of shares but this is not a concern. One can house profits in non-distributed form and draw down tax free as salary in tax free country. Perhaps I am missing something .

 

[JustAnotherNomad]

source

Yes, that’s why I created this thread in the first place. I hope that 10% thing that I found was simply outdated information.
I think Latvia does look quite interesting. Not quite as good as Cyprus, but probably not quite as a red flag either. But then again, the regulation might not be as stable as in Cyprus.

 

[JustAnotherNomad]

Yes distribution of income is subject to tax on sale of shares but this is not a concern. One can house profits in non-distributed form and draw down tax free as salary in tax free country. Perhaps I am missing something .

I meant that an Estonian holding company would hold 30% of a startup for example.
A competitor wants to buy the whole startup. The Estonian company sells its shares in the startup: This will count as taxable capital gains in Estonia, which will be taxed upon distribution. It would not count as taxable capital gains in Latvia or many other EU countries, even socialist countries. And if the Estonian company was paid €5M, then you can’t just pay out a €5M salary. Lol. That would definitely count as a hidden profit distribution per transfer pricing restrictions.
What you could also do is sell the whole Estonian holding company if it doesn’t hold any other shares. But I believe even that would be a taxable transaction in Estonia.
Estonian holding companies really only seem to be good to get rid of WHT on dividends.

 

[Martin Everson]

A competitor wants to buy the whole startup. The Estonian company sells its shares in the startup: This will count as taxable capital gains in Estonia, which will be taxed upon distribution. It would not count as taxable capital gains in Latvia or many other EU countries, even socialist countries. And if the Estonian company was paid €5M, then you can’t just pay out a €5M salary. Lol. That would definitely count as a hidden profit distribution per transfer pricing restrictions.
What you could also do is sell the whole Estonian holding company if it doesn’t hold any other shares. But I believe even that would be a taxable transaction in Estonia.
Estonian holding companies really only seem to be good to get rid of WHT on dividends.

Capital gains in Estonia are taxed only where there is a distribution. Your not distributing the profit from sale held with Estonia holding company. You are sat in your tax free country paying yourself a "salary" from holding company as normal which is not subject to tax in Estonia at any level or in your tax free country. It is much smarter way to get out your money slowly then a lump sum 5m and paying tax unless you got something you want to buy for 5m right away...lol

 

[JustAnotherNomad]

Capital gains in Estonia are taxed only where there is a distribution. Your not distributing the profit from sale held with Estonia holding company. You are sat in your tax free country paying yourself a "salary" from holding company as normal which is not subject to tax in Estonia at any level or in your tax free country.

You even wrote “salary” in quotes yourself. The Estonian authorities aren’t stupid and it’s very likely they would consider the “salary” a hidden profit distribution, especially if you didn’t pay such a “salary” before the sale of the shares.

It is much smarter way to get out your money slowly then a lump sum 5m and paying tax unless you got something you want to buy for 5m right away...lol

Not really. With €5M in my bank account, I could just retire in a nice place, even in a high-tax country. I would have full flexibility.
And of course I might also want to buy a house or make a similar bigger purchase.
It simply doesn’t make sense to use an Estonian holding company when you could just use a company from a different country instead and pay no tax. I’m going to do some more research on Latvia. I would also expect substance to be cheaper there than in Cyprus.

 

[JustAnotherNomad]

I guess there is one other option that could work though: Using a holding company in any other EU country that applies the full participation exemption (even a country like Sweden, lol) and doesn’t charge WHT for EU residents, then move to Estonia to cash out the dividends from the holding company.
But I guess even then it would be easier to just go with a Latvian holding company as it simply offers more flexibility.

 

[Martin Everson]

You even wrote “salary” in quotes yourself. The Estonian authorities aren’t stupid and it’s very likely they would consider the “salary” a hidden profit distribution, especially if you didn’t pay such a “salary” before the sale of the shares.

If salary is excessive then they can claim this. However if salary is inline with market wage then they cannot as in my case. Like anything in life you pay yourself a sensible salary commensurate with your duties that you continue to perform...cough cough.

Not really. With €5M in my bank account, I could just retire in a nice place, even in a high-tax country. I would have full flexibility.

I disagree. The last thing you want is any assets held in your name as you don't gain flexibility you actually lose it for wealth management, inheritance planning and asset protection purposes. Cash in your name is simply stupid thing to do in today's world.

P.s As you can see under my picture I am already retired.... .

 

[JustAnotherNomad]

The last thing you want is any assets held in your name as you don't gain flexibility you actually lose it for wealth management, inheritance planning and asset protection purposes. Cash in your name is simply stupid thing to do in today's world.

I didn’t say you need to keep it in your name. You could store it in a foundation or whatever. But you have full flexibility. You don’t have to live in a tax-free country to receive your “salary” without paying taxes.
With a Cypriot or Latvian holding, you can keep the money in the company and pay yourself a salary, just like with the Estonian company. In fact, Latvia even uses deferred taxation (they’ve copied the Estonian system), but you can also get all the money out at once without paying taxes, should you feel like it.
I think that’s vastly superior to an Estonian holding company.

 

[AdamT1]

Isn’t it quite normal that you only have net VAT refunds when all your clients are abroad? In fact, wouldn’t the input VAT prove that you are actually resident in that country?

You are absolutelly right. In theory all supposed to work just like you say.
However in practice a lot depends on tax authorities attitude and wider tax environment.

In wider context you should be aware of various versions of "Carousel fraud" fraud re:abuse of intra EU VAT reverse charge mechanism and a lot of Easter European companies historically were involved in that.

Thus tax authorities in practice tend to look suspiciously in to companies that only claim refunds of input VAT. There is no problem with it in principle - it is only that they look much deeper in to what is the nature of your business and its substance of local office operations as well as client base.

They just wanna make sure that you dont participate in "Carousel fraud" and your customers are genuine businesses that record invput VAT on your sales in their country.

 

[JustAnotherNomad]

Thank you, that makes sense.
I guess unless there are very large amounts of VAT refunds it shouldn’t be an issue then.